Plansmith Blog

Surge Deposits: Here We Go Again

Posted by Dave Wicklund on 11/1/22 10:00 AM

About two years ago, I wrote a blog declaring the end to, or “the death of,” Surge Deposits. In that post, I had noted how at the time of, and following the 2007-2009 Great Recession, the banking industry saw a substantial influx of deposits as real estate and equity investors liquidated positions and sought safe places to store their money and ride out the storm. I further noted that as CD rates plummeted during, and following, the economic crisis, CD holders weren’t being provided with any incentive to have their money “locked” into time deposits. As time deposits matured, CD holders routinely moved their balances into more liquid non-maturity deposits (NMDs). These former CD holders were essentially temporarily “parking” their money in NMD accounts, just waiting for CD rates to return to what they believed were more “normal” levels, at which time they’d move the balances back into time deposits.

Given the potential liquidity and interest rate risk associated with those surge deposits, regulators expected banks and credit unions to review their deposit composition, identify potential surge deposits, and consider the risk(s) associated with such deposits. In that 2020 article, however, we highlighted that in late 2018 and into 2019, we saw a market-wide spike in CD rates, and it was not uncommon to see one-year CD rates of near 2.75% and five-year CD rates of 3.25% or more. At the same time, most financial institutions left NMD rates at, or near their historic low levels, which should have been more than enough incentive for surge depositors to move their “parked” funds back into CD products. The whole point of the article was to highlight that any former “surge” balances still left in NMD accounts in 2020 should no longer have been considered “surge” or be viewed as having increased volatility characteristics, thus ending the “surge deposit” era.

While I still stand by that argument, it turns out that what’s old is new again, and we’re back to a new era of Surge Deposits; let’s call it Surge 2.0. So, what is Surge 2.0? Well, it’s what happens when the Federal Government injects trillions of dollars of cash into the U.S. economy. And no matter how you feel about the various pandemic-related Stimulus packages, the fact is that the bulk of that cash found its way into banks and credit unions everywhere. We saw deposits at most of our clients’ institutions grow at least 10-20% in 2020. That’s more than a ‘’surge"; it’s a tidal wave, and just like that first era of surge deposits that followed the Great Recession, these 2020 and 2021 surge deposits can be a great low-cost funding source. But, also like those post-recession surge deposits, you can bet that Regulators will be looking closely to see what you’ve done to assess their stability, and more specifically, what adjustments, if any, you’ve made to the decay rates you’re using in your interest rate risk model. More significantly, now that Treasury rates, and even deposit rates in many markets are starting to skyrocket, higher-yielding alternatives are now again available to depositors, and we’re starting to see non-maturity deposit balances at many of our clients beginning to decline.

Regulatory guidance states that as part of formulating decay rate assumptions, “banks should consider adjustments for qualitative factors to reflect current-period market conditions and anticipated customer behavior in response to interest rate fluctuations, for example by adjusting [for] the assumed runoff of surge deposits.” You may even be asked to expand your cash flow modeling efforts to include a stress scenario to show the potential run-off of these newfound deposits.

If you haven’t yet reviewed your deposit base and quantified the level of potential “Surge 2.0” deposits, we can do it for you (and it's not expensive). You'll get complete documentation, including a 20-year deposit trend analysis, and then we’ll show you how to use the results to adjust your decay assumptions and cash flow modeling scenarios.

Have questions or ready to get started with an analysis? Email us and we can schedule a time to talk.

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Don’t Just Budget, Control Your Results

Posted by Craig Hartman on 10/4/22 11:37 AM

Are you really planning, or are you just budgeting?

By this I mean, are you filling out the numbers on a spreadsheet or planning the actions needed to make it a reality?

It’s always gratifying when all the numbers come together in a neat package showing expected growth and earnings for next year. And, there were likely many contributors who verbally expressed their goals and plans on how they are going to reach them. The compiled financial targets are then presented to and accepted by the board, and your monthly comparisons begin. Budget “predictions” are compared to reality. Variances from “budget” are explained, and business continues as usual. In essence, that’s budgeting.

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Branch Profitability

Posted by Sue West on 9/6/22 9:01 AM

Our recent blog discussed Product Profitability, or the process of analyzing your product line by looking at each asset category and adjusting its yield by adding non-interest income, and subtracting applicable loan losses and overhead. The overhead we associated with the asset was its funding liability cost less applicable service charges. This gave us a more heightened awareness of the true earning potential of each earning asset.

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Stress-Free Budget Building

Posted by Sue West on 8/10/22 10:01 AM

Banking is relentless in its daily demand for your time and attention to detail. We know this firsthand, as most of us are former bankers and have been in your shoes.

Stresses around day-to-day responsibilities will never be eliminated, but those associated with your budgeting can be. This is why we built Compass and why you chose us as your software provider.

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Product Profitability and Funding

Posted by Sue West on 8/2/22 9:27 AM

As increased competition and consolidation challenge the financial industry, your business must continue to adapt using strategies for success, not unlike those of other businesses.

Manufacturing and retail have long used product management techniques to meet competitive pressures for pricing, product planning, and growth strategies. If financial institutions are to survive and prosper in this highly charged competitive environment, management must understand and control all components of profitability. Margin and equity risks have been addressed using regulatory rate shock methodologies, as well as recommended and required stress testing of the loan portfolio, including loan losses. Product profitability combines these concepts with an often-overlooked element of cost – overhead.

Before beginning a budget, finalizing any financial plan, or setting in motion any actions for execution, it is imperative that management knows their cost structure. Armed with this knowledge, the team will be able to identify opportunities, avoid diminishing margins, and provide services in the most efficient way.

With this, then, we advocate using a simple and effective Product Profitability analysis. The necessary detail is easy to obtain and manage within your existing planning processes. To begin, you must assign an overhead cost factor to all interest-bearing product lines. This percentage represents the basis point adjustment deducted from an account’s gross yield. You may use either internal or external data for this measure.

Next, determine if there are there other factors affecting your product line’s interest rate that should be noted. For example, costs associated with Loan Losses or Fees that are associated with this product line, but are recorded separately on your income statement.

The last – but very important – factor remaining is the product line’s repricing frequency. As with all other risk analyses, repricing frequency is key to risk management and match funding analysis. By sorting asset balances by repricing frequency, your baseline is now complete. With these details in hand, you will be ready to build a platform for your analysis. Let’s review.


• Repricing frequency
• Current EOM Balance
• Current Yield (FTE)
• Net Overhead Adjustment
• Losses/Fees

Repeat the same for interest-bearing liabilities.

With this simple-yet-analytically-rich information, you can next build an effective analytical report. Here, there are two methods for presenting the data: Match Funding or Funds Pooling.

The example below illustrates the Match Funding method. This analysis sorts first by repricing frequency of the interest-bearing asset. It then funds the asset with liabilities, also sorted by repricing frequency.


This matching approach groups volumes and rates by the inherent repricing risk embedded in your product line. As part of the liability funding, we’ve also distributed an allocation of Capital, both Risk-Based and Excess Capital, to each asset in the analysis.

A waterfall report is then created, as the liabilities “fill up” the asset category until their volumes are matched, then any remaining balances flow into the next asset category. As the balances are matched, the rates are displayed and adjusted for overhead. Loan yields are further adjusted for Loan Fees, and reduced for anticipated Loan Losses. Liabilities are credited with service charges when applicable and the Net Rate is displayed.

The importance of this approach is to identify each asset’s True Rate and True Cost of funding that activity. This method can bring real insight into the true performance of your product line.

It is not uncommon at this juncture for many to argue with the allocations. If that becomes the case within your financial institution, then we suggest a Funds Pool approach.


Funds Pooling uses the same analytical methodology; however, it consolidates the funding liabilities into a pool. The pool remains consistent for all interest-bearing assets, eliminating arguments about liability allocation.

In either case, the end results are significantly informative to the financial institution, including your management team, Board of Directors, and Examiners. What is the TRUE rate for the asset product category? What is its Return on Equity, and what is its cost per $1 of revenue? These are important insights that should be examined regularly, especially during times of economic shifts such as rising interest rates and inflation.

How to Use This Information: There are three specific uses for product profitability information: to develop product strategies for your marketplace; to improve the pricing of service lines to make them more profitable; and, to ensure profitable increased growth.

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Planning: Many Aspects, One Purpose

Posted by Sue West on 7/12/22 2:41 PM

I’m often asked, “What are the differences between a plan, a budget, forecasting, reforecasting, what-ifs, and stress testing?” Although some of the actions are similar and often intermingled in conversation, it’s their purpose that defines them. If you’re a client, most even involve similar keystrokes using your Plansmith software navigation; yet each plays a unique role within your organization’s total planning process. Let’s discuss.

Budget

To start, everyone’s familiar with a budget, but let’s make sure we see it for what it really is. A budget is a prediction or forecast of a financial position at a set time in the future, typically one year. A budget represents a desired financial outcome and requires consent by your board of directors. Most often a Budget is primarily thought of as cost allocations, but when combined with ideas regarding new business, you will often hear it referred to as a Plan. Once approved, the Budget Plan never changes. It is ‘set in stone’ for the duration of your selected time period.

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Adjust to Changing Economic Environments in 6 Steps

Posted by Sue West on 6/7/22 10:41 AM

While the economic environment continues to shift from the effects of COVID-19, financial institutions aren’t out of the woods. As 2022 heats up into the summer months, inflation, rate increases, and an overall sense of uncertainty loom over markets. So, how do you begin to measure the financial impact today’s economy will have on your business? By utilizing a true planning model.

A professional forecasting platform for Budgeting and ALM/IRR adapts to changing conditions. As it is relationship-driven, it can be set to react to environmental changes, including rates. As the rate environment shifts, so should your balance sheet growth and product mix. Planning models help you test the impact of such changes and measure results in minutes, not hours.

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Three Considerations for Rising Rates in 2022

Posted by Dave Wicklund on 5/3/22 9:46 AM

The Fed has officially raised rates, with the intention of continuing to do so several more times this year. What does that mean for your financial institution, and how will it affect your Budgeting and ALM/IRR programs in 2022? Let’s focus on a few areas of concern, specifically Financial Reporting, Strategic Decision Making, and Board/ALCO oversight.

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Help! The Rates Ate My Budget

Posted by Sue West on 4/25/22 10:58 AM

Planning in a Rising Rate Environment….didn’t see this coming?

We all knew that rates would be on the rise in 2022; it’s a normal reaction in an inflationary economy. But how many of us were able to predict when, how much, and how often those changes would occur?

Not to worry, one of the greatest advantages of a full simulation model is its ability to adapt! Managing your current plan should be no big deal as your Plansmith system uses dynamic models and a monthly RateForecast download to keep your plan current. This is truly where our products perform because of their ability to provide management with balance sheet, income statement, and yield/cost information that is current and reprojects the anticipated outcome at year end.

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3 Big Misconceptions of CECL in 2022

Posted by Brett Hendricks on 4/11/22 1:30 PM

CECL is coming soon and isn’t going away. However, many financial institutions have not yet solidified their CECL plans. Maybe your CECL Committee was overwhelmed with choosing a solution, attentions/resources were diverted to pandemic recovery, or maybe busy day-to-day responsibilities and running your bank or credit union unintentionally let CECL slide to the backburner.

Though it’s been a stressful topic for years, Plansmith has made the process of adopting CECL as simple as possible. In fact, almost 300 organizations have already purchased and implemented our CECL solution.

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